Energy policy etc…

It is often said that buying an energy tariff is confusing. This isn’t true, choosing an electricity tariff is simple and completely painless. Compared to virtually all other purchasing decisions, it’s seriously easy. The quality of the actual delivered service is identical and in the vast majority of ways the providers are exactly the same. Think about if instead you had to purchase a television. There are a huge number of different technologies, sizes, price points and brands. Contrast that to the complexity of choosing an electricity tariff. Tools such as price comparison websites do a great job of displaying the relevant data. Consumers can input a few facts about their house and in a couple of minutes they have a personalised quote where the estimated annual cost is displayed.

The difficulty with energy comes at the switching point. Consumers often worry how the transition will take place, are confused and mislead by telephone customer service representatives from every supplier and often have to pay the penalty of three weeks of expensive ‘deemed’ rates. This is a difficult process, and one which I myself have found to be immensely frustrating. While switching in most cases is straightforward, if it ever goes wrong the experience of trying to put it right is often enough to put oneself off switching for a lifetime.

When making energy policy it is important to differentiate between the complexity of switching and the relative ease of choosing the best product. What are the implications of this distinction? Well, first it means that many of the current OFGEM requirements to simplify the products themselves may be misguided. It might, in fact, be more important to look at switching between the products. 24 hour switching might be helpful here, but may only serve to reduce the time between frustrating phone calls instead of making the process automated and reducing the complexity.

The rollout of smart meters by 2020 should make switching between suppliers easier, with data flowing between consumers and suppliers through ‘data communications companies’. However, there is a significant likelihood that this will not be the panacea that many would hope. There have already been difficulties in getting different companies’ smart metering systems to communicate. Furthermore, in countries where smart meters are almost universal, switching rates are still low and the process is still relatively difficult. The diagram below, taken from the data communications provider Smart DCC (part of the capita group), is sufficiently complex to not give a great deal of hope for switching becoming simple. The system outlined below looks like it was designed to minimise the capital outlay and risk for the government (and OFGEM), rather than to serve consumers best.

The best solution would be a centrally provided switching service, run by OFGEM and completely automated. Suppliers should bid into the marketplace with their current tariff offerings, and consumers should be able to switch providers in just a couple of clicks. This could be directly integrated with smart metering systems to allow usage data to be incorporated into the price calculation. This service could be open via an API to price comparison websites, who would also benefit from the increased ease of use for consumers.